FROM October Coles Group will deal directly with Western Australian dairy farmers for its Coles brand fresh white milk.
The supermarket giant, which local dairy farmers blame - along with Woolworths Group - for devaluing their industry through $1-a-litre retail pricing since 2011, plans to extend to WA its direct milk sourcing model rolled out last July in Victoria and southern and central New South Wales.
The model will be extended to South Australia from July 1 and to WA from October 1, but Coles has already said it is interested in recruiting WA dairy farmers willing to sign one or two-year direct-supply milk contracts with it.
Some of WA's 140 dairy farms operate without supply contracts with any of the three major milk processors so will be able to take up Coles' contract offer immediately.
Others come out of existing contracts at the end of next month under changes brought to the dairy industry by introduction on January 1 of a mandatory code of conduct and they may then also be able to apply for a Coles direct-supply contract.
A few farmers may still be bound by existing contract obligations which require them to give their processor a period of termination notice, before they can apply for a Coles contract.
Coles has not indicated what price it is prepared to pay farmers for their milk but said it would guarantee prices and provide flexible supply options.
It has also not stated publically what milk volumes it is seeking - a few large-volume suppliers located near each other would be more viable under the direct sourcing model than a larger number of small suppliers at scattered locations.
It has said the move to a direct sourcing model will give it price control across the whole supply chain for its Coles brand full-cream, low-fat and skim milk products which it currently claims to not have with processors in control of farmgate milk prices.
But under the dairy industry's mandatory code of conduct, from June 1 Coles will join milk processors in publishing a sample standard form agreement on its website for every supply arrangement it proposes to offer farmers for the season.
Under its direct sourcing model Coles falls within the definition of a processor under the code.
Coles will contract its current processor, Lion Dairy & Drinks at Bentley, to exclusively process and package the milk it buys direct from farmers for its own brand milk products.
Under the current contract with Coles, Lion supplies and packages some of the milk it buys from farmers for Coles brand products.
Only a portion of the milk Lion purchases from its 29 suppliers in WA goes into Coles brand milks, the remainder is processed and packaged as Masters brand white milks, flavoured dairy drinks and Pura brand cream.
The current Coles fresh milk contract with Lion is understood to be the biggest volume milk contract in WA.
It was due to expire in September unless Coles activated a further five-year option.
Coles has not said whether its new Coles brand milk package deal with Lion will replace its existing supply and package deal and Lion has said it does not yet know.
Neither company has indicated what is likely to happen to Lion's suppliers who do not end up contracted to Coles.
Some of their milk will be needed by Lion, but not all if Coles is successful in recruiting suppliers from WA's biggest milk processor Brownes Dairy or Lactalis Australia-owned Harvey Fresh.
Lion offered farmers the option of one, three and five-year supply contracts.
Coles has pointed out it already has "toll" arrangements - it supplies milk bought from WA and SA farmers and contracts its processing and packaging - with Lion, Brownes and Lactalis.
By the time the new Coles contract takes effect, Lion Dairy & Drinks and its Bentley plant is expected to have a new owner.
In February the Australian Competition and Consumer Commission approved the sale by current owner, Japanese brewer Kirin, of Lion's dairy interests to China Mengniu Dairy Company Ltd.
A Lion spokesperson said the company was now working on obtaining Foreign Investment Review Board approvals for the sale and it is expected the sale transaction will be completed by the end of the current financial year.
Coles' chief executive commercial and express Greg Davis said Coles was pleased to be able to collaborate directly with more Australian dairy farmers.
"We're proud of the relationships we have built with our directly-contracted farmers in Victoria and southern and central NSW to buy their high-quality milk, and we're thrilled to be able to extend that model to work with farmers in SA and WA," Mr Davis said.
"By offering farmers the opportunity to lock in a price and giving them choice on the length of contract, Coles is investing in the long-term sustainability of our suppliers and the Australian dairy sector."
He said in the Eastern States Coles has also provided additional financial support to directly contracted farmers to help them deal with the impact of bushfire and drought.
Mr Davis said new business models to improve returns for dairy farmers were an important part of addressing the long-term structural issues facing the dairy industry.
"We are committed to investing in sustainable dairy farming and the success of our direct sourcing model shows that it can make a real difference to our suppliers," he said.
In addition to creating a dedicated milk pool, Coles has leveraged its direct relationships with industry stakeholders to establish the Coles Sustainable Dairy Development Group which invests in on-farm sustainability measures and is managed in collaboration with farmers, Mr Davis said.
A Lion representative confirmed that "under a proposed new contract, Lion Dairy & Drinks will continue to contract manufacture the Coles own brand white milk volumes for Western Australia at its Bentley manufacturing site".
"However, the milk will be procured directly by Coles," the spokesman said.
"Lion Dairy & Drinks is waiting on Coles to confirm what volume of milk, if any, that it will still require Dairy & Drinks to procure in Western Australia for the Coles own brand white milk as it transitions to its new sourcing model.
"Once this information is known, Lion Dairy & Drinks will be able to determine its own ongoing milk requirements in Western Australia."
The spokesman said Lion "as a priority" will continue to keep its WA dairy suppliers updated on any changes to required milk volumes.
Dairy farmers interested in contracting part or all of their milk production to Coles can email firstname.lastname@example.org or phone 1300 995 141.
Coles did not respond to questions Farm Weekly emailed to it last week about its direct sourcing model.
Federal Agriculture Minister David Littleproud on Tuesday confirmed Coles was considered a processor when it purchased milk directly from farmers and therefore it and its contracts with farmers had to comply with code of conduct provisions.
"Coles, like any processor, will need to comply with the requirements of the code, offer code-compliant milk supply agreements to dairy farmers they direct source from and publish these milk supply agreements with the farmgate prices on June 1," Mr Littleproud said.
"The publishing of these prices on June 1 presents a great opportunity for dairy farmers and consumers alike to see whether the supermarkets are prepared to pay a fair price to dairy farmers.
"The supermarkets have long held that the processors have the control over returns to dairy farmers and, as processors, it's time to see whether the supermarkets were all talk or whether they are prepared to contribute to a sustainable dairy industry," he said.